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Baby Steps at Pep Boys

Turnarounds are never easy, and I don't think it helps Pep Boys' (NYSE: PBY) cause when other auto parts and service companies like Advance Auto Parts (NYSE: AAP) , AutoZone (NYSE: AZO) , and MunroMuffler (Nasdaq: MNRO) are seeing challenges of their own. It would nevertheless appear that the bleeding has stopped at this one-time favorite of the GARP crowd.

Sales were up fractionally (0.2% to be specific) for the second quarter, while comp sales were up 0.4%. Hey, I said there was some progress -- not breathtaking improvement. Anyway, merchandise comps were up 0.4%, while service comps were flat. Expressed another way, retail comps were down 0.5%, while service center comps were up 1.7%. While the cynic in me wants to observe that the company eventually had to find a bottom after a long stretch of poor performance, it's equally true that this is improvement.

Elsewhere, the results were mixed. Gross margins improved, but most of the improvement came from the retail side of the business. Nevertheless, adjusted operating income (adjusted, that is, for gains on sales) was up about 8%. On a less encouraging note, the company's cash conversion cycle worsened a bit despite a decrease in inventory levels. For a company in Pep Boys' situation, that cash cycle bears careful watching as it may restrict management's options in terms of restructuring the business.

In any event, I have to say that I came away from this conference call feeling better. I realize this is a very "soft" and subjective point, but I just got a stronger sense this time around that management realized that it had many more miles to go before it could, or should, celebrate any improvements in the business.

Seeing as how the only auto "part" that I've ever directly bought is a sunshade, I can't speak to the company's brand value and I won't try. What I will say, though, is that I've seen companies with much worse balance sheets and cash flow execute successful turnarounds. I'm by no means sold on the company's determination to fix the service side of the business (instead of jettisoning it), but I can nevertheless see how folks can construct a turnaround value scenario from this stock.

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